Wednesday, November 26, 2014

The Circular Revolution

DAVOS – In the sixteenth century, the astronomer Nicolaus Copernicus made a profound discovery: the sun, not the earth, was at the center of the known universe. At the time, many denounced Copernicus’s insight as heresy against established Christian doctrine; eventually, of course, the Copernican Revolution paved the way toward a new, scientific worldview and enhanced human prosperity.

Today, the world needs a similar paradigm shift. But this time it is the prevailing economic model that must be transformed.

By 2030, the global middle class will total nearly five billion people, all of whom will expect the same kinds of opportunities and comforts that wealthy populations have long enjoyed. This will put increasing strain on the environment and deplete the world’s stock of resources.

The problem is that the world has long maintained a myopic focus on producing and consuming goods as cheaply as possible. The result is a linear economy based on the rapid use, disposal, and replacement of goods.

Sustaining the current model would require unlimited, easily accessible resources and infinite space for waste – something that clearly is not possible. Indeed, the consequences of our disposable economy – skyrocketing CO2 emissions, unmanageable waste streams, and the increasing difficulty of extracting resources, to name a few – are already apparent.

To find a sustainable alternative, one need only look to nature, where nothing is wasted. Forests, for example, are completely efficient systems, with species’ lifecycles occurring in perfect harmony with the seasons. This underpins levels of resilience and longevity that economic systems should strive to emulate.

Just as ecosystems reuse everything in an efficient and purposeful cycle, a “circular” economic system would ensure that products were designed to be part of a value network, within which the reuse and refurbishment of products, components, and materials would ensure the continual re-exploitation of resources.

Of course, building a circular economy would require a fundamental restructuring of global value chains. Instead of selling products, businesses would retain ownership, selling the use of the goods they make as a service. Selling a product’s benefits instead of the product itself would create a powerful incentive for producers to design for longevity, repeated reuse, and eventual recycling, which would enable them to optimize their use of resources.

This requires a new generation of materials, as well as innovative development and production processes. It also demands new business models, a redefined concept of legal ownership and use, new public-tendering rules, and novel financing strategies. Finally, a circular economy calls for adaptive logistics and a leadership culture that embraces the new system and rewards progress toward establishing it.

Beyond the moral imperative, there is a strong financial argument in favor of the transition to a circular economy – namely, the promise of over $1 trillion in business opportunities. This includes material savings, increased productivity, new jobs, and possibly new product and business categories.

But businesses cannot transform the economy alone. In order to shift firms’ emphasis from minimizing initial costs to maximizing total value, while ensuring the protection of people’s health and well-being, governments should change their tendering processes by implementing requirements for circularity, thereby helping to drive demand for new solutions.

At the same time, consumers must be open to using products that they do not own. Because the circular economy is inherently systemic, it can succeed only if all stakeholders co-design, co-create, and co-own products and services.

With this in mind, my company is redesigning its products and considering how to capture their residual value. At the same time, it is shifting from a transaction- to a relationship-based business model – one that entails closer cooperation with customers and suppliers. And it is changing its corporate culture to emphasize long-term solutions. None of these changes is easy to implement, but all of them are necessary.

Like all major transitions in human history, the shift from a linear to a circular economy will be a tumultuous one. It will feature pioneers and naysayers, victories and setbacks. But, if businesses, governments, and consumers each do their part, the Circular Revolution will put the global economy on a path of sustainable long-term growth – and, 500 years from now, people will look back at it as a revolution of Copernican proportions.

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    1. CommentedAfonso Falcão Gomes

      The overall concept is very well thought, however it's unfair to state that "The problem is that the world has long maintained a myopic focus on producing and consuming goods as cheaply as possible.". It was not a problem. It is becoming a problem. Cheap products mean that technology is available to more people and life quality improves. And a technology will only mature on top of rudimentary inventions. It was not a myopic vision, it was a vision that is evolving as the scale of this model is shifting and growing.

    2. CommentedPeter Blok

      Dear Frans van Houten, what an excellent idea. One of the key issues will be ownership. In the field of labor we see a change in ownership too as knowledge, especially tacit knowledge becomes more and more important. The interesting thing is that this type of knowledge is owned by the (knowledge)workers themselves.

    3. CommentedGuy Kessels

      Dear mr. van Houten,
      very encouraging thoughts at which I would like to add one other area where we should act much more sustainable. And that is the way how we employ people. Quite a way to go there also.

        CommentedPeter Blok

        The way we employ labor might change because knowledge becomes more and more important. The interesting thing is that knowledge, especially tacit knowledge, is owned by the (knowledge)workers. This might lead to completely new labor relations.

    4. CommentedGerry Hofman

      I suggest the 'circular economy' might find a start with the upcoming new innovation in the automotive industry, the 'self driving' car. Every major manufacturer is committed to putting an autonomous vehicle on the road after 2015, and mid century all premium, new vehicles will be self driving cars. By making these vehicles available for anybody needing transport, the amount of traffic on our roads could be cut in half, and by maximizing their passenger capacity, that traffic could be halved again. The responsibility for the maintenance of such vehicles will remain with the manufacturer, while the individual pays an access fee to purchase a licence to allow for primary use. Further use of the vehicle by 3rd parties would be decided by the vehicles' booking schedule and attract a simple fee paid to the primary user. With schemes like this already being discussed in anticipation of radical product change, it would seem that the development of the circular economy is not a possibility but a certainty.

    5. CommentedMK Anon

      Thanks you Mr Van Houten, it is very encouraging to read this, espcially from the CEO of such a big company.

      However, the principle of 'renting' doesn't convince me, because you then rent your life. There are many steps towards a circular revolution that can involve ownerhsip. I would be your first costumer if these happen. Here are a few:

      1) repairability: most product are impossible to repair. Pieces are almost impossible to get. It could also be "modular' products.. you send the broken piece and get the new one, for a fee.

      2) Obviously, this limits inovation. However, you can still have innovation by having 'plugs in'. This is still with the modular idea

      3) Mandatory guarantte of many years can be a solution too. In a recent product I bought, I got a 3 years warranty.. which costed as much as half the price of the product !!

      4) To avoid trash and promote recycling, some countries tax trash. That doesn't work because many react by burning trash or throwing it in public space.. however, if all these equipment had a price the consumer get back, they would do the effort. Microships can be included in the product to track them for disposal.
      It should also be to the producing company to organise the recycling: then products would be conceived in order to minimise recycling costs.

      As you say, this must involve consumers, government and the business world. But I think the first impulse must come from the government, because this will not be profitable and no serious company would switch alone to the new model.

    6. CommentedRushil Ram

      One example: Instead of allowing poor children in third world countries to expose themselves to hazardous when in an attempt to salvage scrap metal from used electronics, perhaps companies and governments could be more active in organizing this process to allow for better yield and worker safety.

    7. CommentedMridula Ramesh

      Thank you for an alternate viewpoint. God knows, the world needs it. While the circular revolution, analogous to a symbiotic environment in a natural ecosystem, is alluring, it may not work. We need to consider the fact the use of goods will be outside the ecosystem.
      An alternate suggestion is to consider full costs - the ecological costs of doing business are not considered because "it is not our problem". Effects of global warming are likely to be felt most by either those not involved in generating the bulk of emissions or by our children, who are not making decisions today. If however, your organization could publish what is would cost to make, say a microwave, wherein there is no increase in an environmental footprint, or better still a reduction in the footprint, and take that price onto the world, and ask customers: "Are you willing to pay for that?". I think that would be a basis for a rich discussion, and hopefully lead to a meaningful change.

    8. CommentedKir Komrik

      There are two key elisions from this article I'd like to address.

      First, the statement that,
      "Sustaining the current model would require unlimited, easily accessible resources and infinite space for waste – something that clearly is not possible."
      is scientifically, objectively and categorically wrong. Those that hold this view are still locked into the view that anything beyond Earth is science fiction. It is not. It is high capitalization to develop the technologies necessary, but it is not outside our technological grasp at all. And it can be made very actuarially sound, in the same way that dozens of 5 billion dollar deep sea rigs are bought and made profitable.

      The second lacunae has to do with the vagueness of the principle. I have proposed a Public Trust that does much the same thing. The difference however, is that it doesn't allow capitalists, governments or the privileged to own everything then "lease" it to everyone else, which is slavery. And I think that is what this article is propounding. Rather, we need a Public Trust separate from government but established by constitutional law which is accessed and maintained by public fiduciaries who are elected.

      The ideas in this article, if I understand the proposal clearly, are as dangerous as those of Anne-Marie Slaughter who advocates a secret, unaccountable world government with no Constitution or institutions by which the public can hold anyone to account.
      What we have now is barbaric and backward and cannot scale, as the author and many others are finally now beginning to realize. In fact, capitalism itself doesn't scale. Big problem. There is so much privilege tied to capitalism I believe these TWO points I've made will be the primary determinants of whether humanity as we know it survives or not.
      I hope humanity chooses wisely and has the insight to see proposals from this article for what they are.
      - kk

        CommentedRushil Ram

        Your first point itself is a dangerous idea. You are essentially arguing that instead of addressing short term environmental issues related to resource depletion, innovation will solve the problem itself. I agree that we may develop the technology to address the issue, but it is crucial we proactively solve these problems before they become a threat to human safety.

    9. CommentedClaudio Migliore

      Dear Mr. Van Houten,
      I read your article with full interest. I am, probably more than most consumers, happy to own and use long lasting products with high long term utility at the expense of higher upfront investment. Owning several of your company's products however, I get the impression that most of them emphasise flashy design and superficial innovation at the expense of long term utility. For instance, my love affair with your electric shavers(handed down from my late father) has been deteriorating over the last few years, as newer one are ever more futuristic while less effective.
      I hope your leadership takes your company down the path you describe, although unfortunately I only plan to be a potential client of yours for a small fraction of your five hundred year planning horizon.

        CommentedRushil Ram

        Look no further than the newest wifi-equipped refrigerators to understand that what you describe is an economy-wide trend. Planned obsolescence, while necessary for innovation, has diminishing marginal returns which we are beginning to see now.
        Perhaps with the global surplus of labor, it will become more efficient and sustainable to design products that are built to last and cheap to service and maintain.

    10. CommentedZsolt Hermann

      I fully agree with the writer, but the paradigm shift has to be much more fundamental.
      It is our own human nature that needs adjusting, adapting to the surrounding and governing natural system before we attempt any structural changes otherwise we will continue our failed experiments the same way, with the same result.
      And such fundamental human change has to be based on positive motivation, not on coercion, trickery or scare tactics as otherwise again it will not work,
      And the only way of achieving a fundamental, almost "super-natural" change in ourselves is through education for the young and for the adult at the same time. We need to change our complete operating software from subjective, individualistic to objective, mutual and collective.
      We have all the necessary transparent, scientific information, and the practical data from the daily events of the crisis and from previous human social experiments, we simply have to put the program together and implement it, so we can truly break through into a circular existence from our present linear, fragmented, polarized one.

    11. CommentedPaul Ross

      I wish you could hear me clapping, Mr. Van Houten. I will do my best to support your vision by looking for your products in preference over those who do not share your vision.

      Thank you for being a breath of fresh air in the business world.